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Better ways to tax: USA in the spotlight

Author: ICAEW Insights

Published: 27 Nov 2020

The letters 'USA' on a green background

The pandemic has presented governments with the opportunity to reform their tax systems with incentives and infrastructure in place to encourage investment. But will they? We take a look at what is expected from the USA. Words by Christian Doherty.

At the time of writing, President Trump had accepted a formal US transition should begin for President-elect Biden; but control of the US Senate is dependent on two ‘runoff’ elections on 5 January. The current Administration and the US House will discuss coronavirus stimulus legislation during the ‘lame duck’ last three weeks of the 116th Congress but it is more likely that serious discussions will take place after the 117th Congress is sworn in on 3 January.

Edward S. Karl, Vice President, Taxation, at the American Institute of Certified Public Accountants, says: “The US faces unprecedented levels of debt and budget deficit that are not sustainable. During his campaign, President-elect Biden indicated that he would raise the corporate rate to 28%; install a corporate minimum tax; raise the marginal tax rate for individuals earning more than $400,000 to 39.6%; and raise the capital gains rate on individuals earning more than $1m. Achieving these changes will be difficult unless the Democrats gain control of the Senate on 5 January.”

While Republicans have sought to simplify the regime and reduce the tax burden on companies and individuals, the Democrats have aimed to use the tax code as a way to redistribute national income. Zigzagging between these two poles has resulted in a tax code that runs to around 7,000 pages with almost a trillion dollars in annual exemptions and loopholes.

The power of entrenched special interests has stymied meaningful reform since the 1980s. So will COVID-19 break that impasse?

“The general direction is towards a more progressive system,” says David Rosenbloom, James S. Eustice Visiting Professor of Taxation and the Director of NYU’s International Tax Program in the US.

“Post-COVID-19, there will be pressure to raise corporate taxes, and the economy could withstand that. Most experts agree that the US ought to have a relatively low-taxed corporate sector with much fewer special rules and deductions, which are basically deals cut for special interests.”

In Rosenbloom’s view, the US must also finally seriously consider the possibility of adopting some form of national system of VAT. “It has to do it; it can’t rely on income tax to fund the government. I don’t know if that would ever fully disappear but there could be a rethink on VAT.”

The key question on tax reform in the US remains simple: is there enough will, expertise and energy to affect real change? “On expertise, the Democrats can call upon the Brains Trust to drive that. So that’s not a problem,” says Rosenbloom, who believes the energy is there too.

But the hard one is will. “A lot depends on the business community. If it were to try to offer a solution to the problem it could go a long way to achieving a better system.

“Business people must know that for the country to function properly they need to look beyond the $100m paychecks for themselves. If the country is to properly invest in its health, education and so on then the tax system needs to serve that.”

One change that would make all the difference in the US tax system would be to adequately fund the Internal Revenue Service (IRS), Rosenbloom says. “Americans have to understand that if they want a decent health system, proper education and an international presence in the world, then they have to pay for it.”